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July 5, 2022 at 6:07 am
March 4, 2022 at 12:03 pm
Hi sir, I think, DCF for year 4, should be discounted by 0.683 instead of 0.751 as per Q1 March 2020,.
John Moffat says
March 4, 2022 at 2:48 pm
No. 0.751 is correct and I explain why in the lecture (and is explained in the printed answer). Using the dividend valuation formula for years 4 to infinity gives a PV in 3 years time, so this needs then to be discounted for 3 years.
In Q1 of 2020, the flows are from year 5 onwards (not year 4) and the answer is then discounted for 4 years.
May 20, 2021 at 8:37 pm
Hi Sir, as we know the formula for computing the cost of equity under the CAPM method is: Ke = Rf + Equity beta * (E(rm) – Rf).
However, in practicing other questions, particularly valuation questions, I notice that in the answers, the Rf rate is not deducted from the E(rm) as required in the formula. Do you have an idea why this is so?
May 21, 2021 at 9:11 am
It depends whether the question tells you the market return or the market premium. When you are given the market premium then this is the return on the market less the risk free rate. (So if the risk free rate is 5% and the market return is 15%, then the market premium is 10%)
May 24, 2021 at 8:28 pm
Thank you sir! This has been very helpful.
May 25, 2021 at 7:41 am
You are welcome 🙂
salvia cardoso says
March 11, 2021 at 2:02 pm
Thank you for the very clear lesson. I have a question… why isn’t the loans repaid included in the equation.
March 11, 2021 at 5:06 pm
You will have to say which equation / question you are referring to 🙂
November 28, 2022 at 12:36 am
Hi John. In example 2, there is a loan repaid of 48. Any particular reason why we do not account for that?
November 28, 2022 at 7:36 am
The free cash flow is the cash available for all lenders (i.e. equity and debt).
However when we are asked for the free cash flow to equity (as in example 4) then we are after the cash available just for the equity and then we will subtract anything going to debt.
July 24, 2020 at 8:54 pm
Hi John, not sure if this is the correct place to ask this. If we have a cash flow which increases in perpetuity like in the above example, how would we account for tax on this cash flow? Would it be the same as years 1 to 3 by simply taking the cash flow and deducting tax? Thanks in advance.
July 25, 2020 at 9:58 am
It depends on the timing of the tax. If tax is payable without any delay then yes – you would take use the cash flow less tax. However if (as is more likely) there is a one year delay in the tax, then you need to calculate the PV of the cash flow before tax, then get the PV of the tax flows by multiplying the PV of the before-tax cash flows by the tax rate and discounting this figure for one year.
(It is OK asking here except that I don’t always see comments here. So better is to ask in the Ask the Tutor Forum – I always see questions posted there and so always answer 🙂 )
July 25, 2020 at 11:10 am
Hi John, thanks very much for the speedy reply. This has made it a lot clearer for me.
July 25, 2020 at 5:45 pm
April 20, 2020 at 8:08 am
Sir in eg 2 the free cash flow of $228is the total value of the firm right and not the market value of the equity.
July 25, 2020 at 5:48 pm
No – that is just the cash flow for the year.
The PV of the free cash flows will be the value of the firm (equity + debt) 🙂
March 15, 2020 at 4:39 pm
What is the reason for not deducting interest in Example 2. Earning are given before interest and tax, so we have to deduct tax and add back depreciation. Please explain
March 16, 2020 at 7:09 am
The after-tax interest is accounted for in the calculate of the WACC.
Just as when appraising projects we never include interest in the cash flows for the same reason.
August 13, 2019 at 8:56 am
Hi John, why isn’t loans repaid deducted?
August 13, 2019 at 11:05 am
It is when calculating the free cash flow to equity, but not when calculating the free cash flow to the firm.
May 7, 2019 at 12:53 pm
Hello. Please tell about the example 2: why don’t we subtract the interest paid to get the free cash flow?
May 7, 2019 at 2:10 pm
Free cash flow is before interest (just as we ignore interest in Paper FM (was F9) when appraising projects. We discount at the WACC (which takes account of the cost of debt) to get the value of the business.
The free cash flow to equity is after interest, and is discounted at the cost of equity to get the value of equity.
I do explain all of this in the free lectures.
October 6, 2018 at 5:22 am
hi john why don’t we discount for four years because the qstn is saying from 4 yrs to infinity
October 6, 2018 at 11:46 am
Multiplying by 1/r give the PV at time 0 of a perpetuity starting at time 1.
Since the prepetuity starts 3 years late (at time 4 instead of time 1) multiplying by 1/r gives a PV 3 years late – at time 3 instead of time 0. So we need to discount for 3 years.
August 28, 2018 at 12:35 pm
Hi John, the values are not given for example 2; free cash flows; in the lecture notes. can you please reply back with the question.
August 28, 2018 at 7:23 pm
Download the notes again – they were re-uploaded a few weeks ago.
August 29, 2018 at 11:03 am
July 13, 2018 at 8:44 am
For the FCF formula, Is the amount needed to replace non-current asset considered as capital expenditure? If yes, does that mean we separate total capex investment into 2 part, one is to replace current depreciated fixed asset (of which equal to depreciation), and the other part is to invest additional fixed asset?
July 13, 2018 at 2:56 pm
Correct (although you don’t really need to show the split – just don’t add back the depreciation, but do subtract any additional investment).
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